2nd October 2024 - Navigating Surety Bonds: The Impact of Credit Ratings on Partnerships

When it comes to financial institutions, the heft of their credit rating is an essential part of your Finance and/or Treasury department’s decision to partner with them.

This is particularly salient for surety bonds where the Guarantor will be heavily scrutinised by your Principal/Employer.

There are a number of Credit Rating Agencies (“CRAs”) that evaluate the financial strength of insurers, sureties, banks and other financial institutions. The principal CRAs are:

• Standard & Poor’s
• Moody’s
• Fitch
• A M Best

 

Each CRA is authorised and regulated by the Financial Conduct Authority (“FCA”).

Please see below extract from the FCA website on CRAs:

“In line with the FCA’s Approach to Supervision, we supervise CRAs as members of a portfolio of firms that share a common business model.

CRAs perform an integral role within global financial markets by providing opinions on the creditworthiness of a wide variety of financial instruments.

Credit rating activities must be conducted in accordance with the principles of integrity, transparency, responsibility and good governance in order to ensure that resulting credit ratings used in the UK are independent, objective and of adequate quality.”

To read the full article which includes the list of recognised credit ratings agencies, follow the link: https://www.fca.org.uk/firms/credit-rating-agencies

The following extract from the Standard & Poor’s website explains the importance of the credit ratings:

“An S&P Global Ratings issue credit rating is a forward-looking opinion about the creditworthiness of an obligor with respect to a specific financial obligation, a specific class of financial obligations, or a specific financial program (including ratings on medium-term note programs and commercial paper programs).

It takes into consideration the creditworthiness of guarantors, insurers, or other forms of credit enhancement on the obligation and takes into account the currency in which the obligation is denominated.

The opinion reflects S&P Global Ratings’ view of the obligor’s capacity and willingness to meet its financial commitments as they come due, and this opinion may assess terms, such as collateral security and subordination, which could affect ultimate payment in the event of default.”

To read the full article, follow the link: https://disclosure.spglobal.com/ratings/en/regulatory/article/-/view/sourceId/504352

DRS utilises sureties that meet “investment grade criteria” (minimum “A-” with Standard & Poor’s or equivalent with other ratings agencies).

Prior to Brexit, most sureties had UK based companies to issue surety bonds, typically from London.

The FCA continues to allow sureties domiciled in the European Union (“EU”) to operate under their regulatory umbrella.

In summary, the surety’s credit rating (if investment grade) always trumps its country of domicile.